TS. DAVAADORJ Director of Information & Analysis Service, National Security Council of Mongolia

1. Mongolia’s relations with North East Asian countries and possibility of involvement in regional integration TS. DAVAADORJ Director of Information & Analysis Service, National Security Council of Mongolia October 3rd, 2013

2. Contents: I. Northeast Asia cooperation • Political difficulties • Northeast Asian economy • Greater Tumen Initiative • Energy security in NEA II. Mongolia and NEA countries relations • China-Mongolia • Russia-Mongolia • Japan-Mongolia • South Korea-Mongolia • North Korea Mongolia III. Mongolia-Russia cooperation opportunity in the region • Main Necessities of Russia-Mongolia Cooperation • New “Silk Road” • Opportunity of Russia-Mongolian cooperation /railway/

3. Abstract • The most important subregion in Asia, Northeast Asia - comprising the China, Japan, South Korea, North Korea, Mongolia, and the Russian Far East - is key to Asia’s success in contributing to global prosperity and stability. • These countries occupy sensitive geo-political positions in both the Cold war and contemporary eras. The region’s major political challenge is to maintain peace and security in the Korean peninsula and manage the territorial disputes among some countries, while pursuing economic cooperation to promote growth and development, trade and investment integration, physical connectivity, energy security, and environmental sustainability. • In recent years, Mongolia has shown signs of economic growth. Mongolia’s mining wealth is attracting attention beyond its Russian and Chinese neighbours. Mongolian active participation and role is important in Northeast Asia.

4. I. Northeast Asia Cooperation

5. Northeast Asia • Japan, South Korea, North Korea • Mainland China, Hong Kong, Taiwan • Russia, Mongolia

6. Political Difficulties: • Legacies of World War II - Japanese atrocities in Pacific Asia • Legacies of Cold War - Partition of Korea • Territorial dispute - Japan – China - Japan - Russia - Japan – Korea etc

7. Northeast Asian economy • China, Japan and South Korea are the world’s second, third and 11th biggest economies in the world. These three NEA countries hold significant global economic power in the 21st century. Japan followed outward foreign investment, Korea adopted export-driven growth, and China launched a going out strategy. • Russia’s plans for developing its Far East are based on the region’s potential. Russia’s Far East is certainly rich in resources, including metals and minerals. It is also well placed to be a transit and logistics hub for shipping Russian oil and gas onward to Asia and Asian-made goods deeper into Russia. • Mongolia’s copper, gold, coal, molybdenum and others mining deposits have attracted foreign direct investment. Mongolia’s medium-term economic prospects are favorable. The mining sector is expected to continue to be the main engine of growth in 2013 and 2014, with commercial production at the OyuTolgoi copper and gold mine starting in mid-2013. Growth in GDP: 12.3% in 2012. 17.5% in 2011.

8. Asia-Pacific Economic Cooperation(APEC) • Established in 1989 by the initiative of Australia • Its members are 21 Pacific Rim countries or formally “Member Economies” • Main factors led to establishment • Growing interdependence of Asia-Pacific economies and the advent of regional trade blocs in other parts of the world; • Fears that highly industrialized Japan would come to dominate economic activity in the Asia-Pacific region; • Establish new markets for agricultural products and raw materials beyond Europe

9. “Bogor Goals” (was adopted in 1994 Bogor, Indonesia) “Creating free and open trade and investment in the Asia-Pacific by 2010 for industrialized economies and by 2020 for developing economies” • APEC's Three Pillars To meet the Bogor Goals, APEC carries out work in three main areas: 1. Trade and Investment Liberalization 2. Business Facilitation 3. Economic and Technical Cooperation • Last summit - Vladivostok, Russia (September 9-10, 2012) • Bali – Indonesia (October 5-7, 2013)

10. Membership and Enlargement Current members Announced interest in membership

11. China-Japan-South Korea FTA • In December 2011, the three countries held a final joint study meeting on the feasibility of an FTA among them. • In January 2012, the South Korean and Chinese presidents announced that they would move towards negotiating a bilateral agreement between the two countries. • In March 2012, the three countries concluded an investment agreement among themselves which is viewed as a step towards a more comprehensive FTA. In May 2012, China and Korea held their first round of negotiations towards an FTA in Beijing. • Three sides discussed key issues such as ways to lower tariffs and the scope of future negotiations based on terms of reference adopted at the first round of talks. • The second round of negotiations for a Free Trade Agreement (FTA) among Japan, China and the Republic of Korea (ROK) was held in Shanghai, China from July 30 to August 2. In this round of negotiations, areas such as Trade in Goods, Trade in Services, Customs Procedures, Competition Policies, amongst others, were discussed. • The third round of negotiations will be held in Japan in November or December , 2013.

13. Economic indicators of Northeast Asian countries, 2011

14. Economic integration in NEA“Greater Tumen Initiative” • Northeast Asian economies have undertaken an infrastructure cooperation initiative, called the Greater Tumen Initiative (GTI). Established in 1995 under an earlier name, the GTI is an intergovernmental cooperation mechanism in Northeast Asia, supported by UNDP, with the current membership of four countries: the PRC, the Republic of Korea, Mongolia, and the Russian Federation. The GTI has an institutional framework consisting of two intergovernmental bodies (the Consultative Commission and the Coordination Committee), the Tumen Secretariat, and the Council of Eminent Persons for the TumenProgramme. • The origin of the GTI is in the Tumen River Area Development Programme (TRADP), a subregional program by UNDP commenced in 1991. Its member countries included the PRC, the DPRK, the Republic of Korea, Mongolia, and the Russian Federation, with Japan, Finland, Canada, the World Bank, and ADB holding observer status. It started as a planned 20-year-long program, which envisioned a grand design to transform about 3,000 square kilometers (km) of the Tumen River Economic Zone into an economic center in Northeast Asia, like Hong Kong and Singapore. The financial needs for the project were estimated at about $30 billion. However, due to financing difficulties, the project was adjusted to focus on five sectors: trade and investment, transport and communications, environment, tourism, and energy.

15. Since its commencement, the TRADP had experienced three phases. • Phase I (1991–1996) attempted to create a joint special economic zone to be built on land leased from the PRC, the DPRK, and the Russian Federation.It was envisaged that significant infrastructure investment would be required for this internationally managed cross-border zone. • Phase II (1997–2000) aimed to operationalize the agreements signed in Phase I and advance development within the subregion with a focus on trade, investment, and environmental management. • Phase III (2001–2005) had a dual objective of strengthening the institutional framework of the initiative and continuing to contribute to the economic development of the subregion through concrete actions in the five sectors mentioned above (trade and investment, transport and communications, environment, tourism, and energy)

16. Despite its large potential, however, the GTI has not been able to make substantial progress in terms of subregional economic and infrastructure development as well as cooperation. The main obstacle has been political. • First, political commitment to subregional development cooperation has not been as strong as in Asia’s other subregional groups, as evidenced by a lack of leaders’ or even ministers’ processes.Sufficient financial resources have not been put by member countries. • Second, Japan has never been a member of the TRADP or GTI, and the DPRK withdrew its membership. Japan has not joined the program and/or initiative because of the unfavorable political relationship with the DPRK. • Third, without tangible economic reforms and opening on the part of the DPRK—not to mention its GTI membership withdrawal—support for infrastructure development may not bear sufficient fruit. A significant improvement of political stance, external relations, and economic regime in the DPRK would be needed for the GTI to become truly effective.

18. Approved Greater Tumen Initiative Projects

19. Energy security in NEA • Energy security has emerged as one of the hottest agenda in Northeast Asia. There are three major consuming countries (China, Japan, Korea), and two major producing countries (Russia, Mongolia). • It has been assumed that cooperation between NEA countries would be necessary since all have faced a major challenge to secure their energy supply. However, in spite of shared sense of necessity, regional energy cooperation was largely unsuccessful.

20. NEA energy security threatening factors • Rapid Growth of Energy Demand • EIA (Energy Information Administration of USA) forecast of annual growth rate for 1999~2020: China 4.7%, South Korea 2.8%, World Average 2.2% • Growing Dependency on Oil • Oil becoming the leading primary energy in NE Asia • China (2nd largest consumer), Japan (3rd), South Korea (10th) • Increasing Import from Outside the Region • 76% of NE Asia oil imports from the Middle East in 2011: Japan (87%), S.Korea (72%), China (46%) • Vulnerability to Environmental Issues • High dependency on coal (64% in China) and oil (S. Korea 51%, Japan 50%, China 30%)

21. Main Necessities of NEA Energy Cooperation • Diversification of energy supply sources from Middle east Asia • Expand scale of energy industry - Effective development of resources throughout technology transfer - Create and specialize business activity in energy projects • To establish new energy market - Secure a stable energy demand - Exploit and export energy resources from East Siberia and the Far East - Spill-over effects and expanded energy markets • To build up energy infrastructure -Set-up energy distribution and infrastructure system in Siberia Far East and Mongolia

22. Potential Energy Cooperation Projects • Resource and transportation route development projects • Construction of expanded crude oil pipeline in East Siberia • Development of natural gas. • Construction of cross-border pipeline networks: < Russia – Mongolia - China - Korea > < Russia - China - Korea > and < Russia - DPR Korea - Korea > • Cross-border power interconnection grids Mainland China-Korea-Russia • Security of Coal transit rail corridor over China and Russia • Development of • Down-stream cooperation projects • Joint strategic oil stockpiling • Sharing refinery/upgrading facilities

23. Comparison of Mongolian coal deposits

24. Comparison of Mongolian coal deposits

25. II. Mongolia and Northeast Asian countries relations

26. North East Asia

27. China - Mongolia • Mongolia and China established diplomatic relations in 1949. Over the last 10 years in particular, their relations have developed rapidly and made remarkable achievements. • In 1994, bots sides signed again Treaty on Friendship and Cooperation between China and Mongolia, laying the political and legal foundation for the healthy and steady development of their relations. • Two countries established Strategic partnership in 2011. In recent years, Mongolia has been following a friendly relationship and a policy to develop sustainable mutually beneficial cooperation with the China. China involves actively in Mongolia’s infrastructure progress, besides to advocate Mongolia on mining, transit traffic, agriculture and energy industry sectors. Mongolia is willing to cooperate with China in mining and infrastructure sectors on long term. The transit freight rates via Tianjin municipality have not been resolved yet, which means Mongolia as a landlocked country, this issue is an utmost important one to be solved in the near future.

28. Japan-Mongolia • Diplomatic relations between Japan and Mongolia were established in 1972. • Substantial expansion of the bilateral relationship has taken place since Mongolia's democratization and transition to market economies in 1990. Japan has been providing to Mongolia top donor since Mongolia’s democratization. Mongolia states that Japan is important developing relations of “Strategic Partnership” from traditional good friendly third neighbors of Mongolia. • Mongolia and Japan established “Comprehensive partnership” in 1997, the two countries proposed a new objective to step up the relations of the two countries to level of strategic partnership. This will further strengthen mutually beneficial relations substituting each other’s disadvantages, and it will be an important step to cooperate within the framework of politics, economy, and environment those are challenging the region of Asia and international communities. Also, parties confirmed to immediately establish Economic partnership agreement /EPA/.

29. Prime minister of Mongolia N.Altankhuyag and Prime minister of Japan Shinzo Abe held official talks in Tokyo on september 13, 2013 and signed the medium term program for Strategic partnership. This document determines the activities for the next five years of the Mongolia, Japan partnership.

30. South Korea - Mongolia • South Korea is the first nation to establish diplomatic relations with Mongolia after 1990 Democratization in March, 1990. • Agreementon “Foreign trade, investment, economic, scientific, technological, cultural cooperation” signed in March, 1991. • High level visits are frequent since establishment of diplomatic relations. • Agreement on “Energy, natural resources development” based on mutual benefit and cooperation signed in 1999. • Economic relations growing since 2000. • Agreement on “Good neighborly cooperation partnership” signed during President Roh Moo-Hyeon’s visit to Mongolia in 2006. • Agreement on “Comprehensive partnership” signed during President Lee Myung-Bak’s visit to Mongolia in 2011.

31. North Korea-Mongolia • Mongolia and North Korea established diplomatic relations in 1948. Mongolia became the second country to recognize North Korea after the Soviet Union. • North Korea and Mongolia are strengthening economic cooperation as national interests of the two states overlap in many areas. As Mongolia is a landlocked country, Ulaanbaatar wants to take advantage of North Korea’s Rajin Port as a conduit to export Mongolia’s natural resources to foreign countries since access to the East Sea via use of the port can significantly reduce transportation costs. • North Korea sends a large number of workers to Mongolia to work at construction sites. Radio Free Asia (RFA) reported on July 3 that there were 1,749 North Korean workers dispatched to Mongolia as of April — the second largest group of foreign laborers in Mongolia (second only to the Chinese at 5,976 workers), which has a total of 12,064 workers from 103 countries.

32. Six-party talks have continued, on and off, for years between South Korea, North Korea, China, the U.S., Russia and Japan. Mongolia has maintained good relations with North Korea for decades. So Mongolia seeks to play peacemaker as North Korea. • The official bilateral talks between the Governments of DPRK and Japan hold in Ulaanbaatar under the auspices of the President of Mongolia Ts.Elbegdorj on November, 2012. Mongolia negotiated with both parties to conduct the meeting in Ulaanbaatar, and deems by hosting this Foreign Ministerial-level talks between North Korea and Japan in its own territory would contribute Mongolia’s role to normalize the sustainable situation in the Northeast Asian region, moreover bring the relationship between the two countries into the new level of mutual understanding. • Mongolia plays a unique role in the Korean Peninsula by continuing close relations with its North Korean neighbor. Mongolia is perceived by Pyongyang as Northeast Asia’s only non-threatening nation. Mongolia is also one of the few if not the only country in the world which has a visa free regime with North Korea.

33. Initiative on “Ulaanbaatar Talks on Security of Northeast Asia” President of Mongolia Ts.Elbegdorj held a meeting with Secretary General of the United Nations Mr. Ban Ki-moon during the 68th General Assembly meeting and informed him about Mongolia’s initiative on holding “Ulaanbaatar Talks on Security in Northeast Asia”. Secretary-General expressed thanks and said UN will back all activities initiated by Mongolia for contributing peace and security in the region.

34. ROK Northeast Asia peace initiative“Seoul Process” • South Korean President Park Geun-hye unveiled her vision to promote peace in Northeast Asia, inviting North Korea to join in the trust-building process. • The “Seoul Process” calls for participating states to enhance cooperation, first on non-political issues such as climate change, terrorism prevention and atomic power • The initiative is expanded version of Park’s “Korean Peninsula trust process” that calls for greater exchanges and cooperation between the two Koreas.

35. Russia - Mongolia • Diplomatic relation has been established between two countries in 1921. • Mongolia shares its 3,500-kilometer border with Russia. • In the concepts of Mongolian Foreign policy and National Security reflected that forging neighborly, close bilateral relations with Russia and China is priority of Mongolia and should develop multilateral cooperation with them. • Mongolia-Russia relations can be fitted on following timeline: • 1921-1991 Socialist era relations • 1991-1995 Slow down of relations between two countries • 1995-1999 Stabilization of relation • Since 2000 New beginning for Mongolia-Russia relations

36. Economic cooperation between Russia and Mongolia • Cooperation in the field of economic relation between Russian and Mongolia can be defined through following factors: • Joint ventures (“Erdenet Mining Corporation”, “Mongolrostsvetmet LLC” , “Ulaanbaatar Railway Joint Venture Company”) • Import of oil products from Russia (Mongolia imports almost all needs of its oil products from Russia) • Russian participation in Mongolian mining sector (especially in uranium mining sector and recently in projects such Tavan-Tolgoi etc.) • As of September 2011, trade turnover between two countries was $1.2 million. (trade deficit between two countries reached $ 1 million)

37. Russian direct investment into Mongolian economy has been increased by 61% in 2011. Trade turnover between two countries is increasing year by year too. However the trade deficit is still high for Mongolia. • Trade between two countries consists of relatively few amount of products generally based on mining sector. • In the face of decreasing Russia’s role in Mongolian trade and increased Chinas role, there arises need to develop trade between our countries in order to protect our interests .

38. Russian direct investment in Mongolia • FDI shares in Mongolian economy(total 3.9 billion): mining sector /85%/, construction/5%/, banking and finance sector /3%/, communication /1%/

39. Russian export to Mongolia compared to other countries: • Mongolian import amount has been increased by 115% as of September 2011. Import from Russia increased too, but when its compared to last year, its share in total import has decreased from 34.3% to 23.7%.

40. Mongolian export to Russia compared to other countries: • As of September 2011, Mongolian export has grown up by 73% compared to September 2010. The export amount to Russia has increased, but its share in total export has decreased from 2.7% to 2.0%.

41. III. Mongolia-Russia cooperation opportunity in the region

42. New “Silk Road” • China unveiled China’s new Central Asian policy as a “new Silk Road” of free trade and exchange. China suggested a free trade zone that includes China and Eurasian countries, which have combined population of 3 billion. • Beijing considers relations with Central Asian countries a foreign-policy priority. • Proposing a new Silk Road is a strategic necessity for China. As a great power, China has to protect its vital economic interests and political influence in the region. The new Silk Road proposal does that.

45. China and CIS Countries Economic Cooperation • Theworld’s newest Free Trade Area (FTA) will cover 5 CIS countries. • Trade between China and 5 CIS countries ballooned from $460 million in 1992 to $46 billion in 2012.

46. China’s Provincial GDP Growth Rates in 2012 • China’s central provinces GDP grew by over 12% in 2012 • Going forward, most of China’s economic and industrial growth is expected to be generated from four cities in Central China: Xining, Yingchuan, Lanzhou, Chengdu

47. How do you reach the growth markets in Central China ? • New Western Mongolian Rail line to Jiayuguan • New Northern Rail line connecting to Trans -Mongolian Rail line to Yinchuan

48. №1. New Western Mongolian Rail line to Central China • The shortest rail route from Kyzyl to Central China: 1107~1475km • Reach new industrial cities in Central China: Kyzyl Tsagaan Tolgoi 204km Zabaikalsk - Manzhouli 2774 km Grodekovo 5390 km Laoemai, China 1107km Shiveekhuren-Sekhe 1475km Jiayuguan, China 1935km

49. №1. Cut transportation distance • Cut transportation distance and time by up to 1.4x ~ 2.8x 2.8x 1.4x

50. №2. Northern Rail line Connecting to Trans-Mongolian Rail line Kyzyl • The shortest rail route from Kyzyl to Yinchuan: 3060 km Ovoot 240km Erdenet 835km Erenhot 1935km Yinchuan 3060 km